Problem 1: A firm has the following investment alternatives. Each one lasts a year.
Investment A B C
Cash inflow $1,150 $560 $600
Cash outflow $1,000 $500 $500
The firm's cost of capital is 7 percent. A and B are mutually exclusive, and B and C are mutually exclusive.
a. What is the net present value of investment A? Investment B? Investment C?
b. What is the internal rate on investment A? Investment B? Investment C?
c. Which investment(s) should the firm make? Why?
d. If the firm had unlimited sources of funds, which investment(s) should it make? Why?
e. If there were another alternative, investment D, with an internal rate of return of 6 percent, would that alter your anser to question (d)? Why?
f. If the firm's cost of capital rose to 10 percent, what effect would that have on investment A's internal rate of return?
Problem 2:
If the cost of capital is 9 percent and an investment costs $56,000, should you make this investment if the estimated cash flows are $5,000 for years 1 through 3, $10,000 for years 4 through 6, and $15,000 for years 7 through 10?